Regulation changes for 2023 and onwards
Daniel Redman

"A lot has happened, and a lot is going to happen, in the coming years. "

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In 2022, we saw the establishment of the International Sustainability Standards Board (ISSB) at COP26, we saw plans to replace the Non-Financial Reporting Directive (NFRD) and we saw the UK’s Greening Finance plans begin to take shape.

A lot has happened, and a lot is going to happen, in the coming years. 

In this blog, we look to provide a short and simple overview of key regulations which are coming in the following years.  

The European Union Corporate Sustainability Reporting Directive

From 2023, the NFRD will be replaced by the Corporate Sustainability Reporting Directive (CSRD) in an effort to achieve the Green Deal’s ambitions of a sustainable EU economy by 2050.

What do you need to know?

  • The CSRD significantly expands the scope of companies required to comply with the regulation, now making 50,000 companies applicable compared to 12,000 by its predecessor, the NFRD. This new scope includes all large companies and listed companies on EU markets, as well as parent companies to large groups and third-country undertakings. 
  • Entities are required to report in line with double materiality. 
  • The CSRD requires limited assurance on sustainability reporting, which is expected to increase to reasonable assurance in the future. 
  • The new proposal also states that the sustainability disclosures must be digitally tagged in XHTML format in accordance with ESEF

When will it happen? 

The implementation of the CSRD will be staggered, with large undertakings being the first to report in 2025.

  • 2025: Businesses already subject to the NFRD will have to start reporting their sustainability disclosures digitally in the financial year ending 2024.
  • 2026: Large undertakings not currently subject to the NFRD will have to start reporting in the financial year ending 2025.
  • 2027: Small and medium enterprises and small and non-complex credit institutions and captive-insurance undertakings will have to start reporting in the financial year ending 2026 - with a further possibility of voluntary opt-out until 2028.
  • 2029: Non-European companies that have branches or subsidiaries in the EU will have to start reporting in the financial year ending 2028.

The International Sustainability Standards Board’s exposure drafts 

On 31 March 2022, the ISSB released exposure drafts for two standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. 

What do you need to know?

  • General requirements for disclosure of sustainability-related financial information
  • Calls for entities to disclose information on all significant sustainability-related financial risks and opportunities. 
  • The general draft is based on the IFRS Accounting Standards (IAS 1 and IAS 8) and the core content is consistent with the regulations set by the TCFD. 
  • For each material issue, the exposure addresses the entity’s governance, strategy, risk management, metrics and targets concerning the sustainability-related risks and opportunities. 

Climate-related disclosure

If climate is a material risk to an entity, it must use the climate-related disclosure in addition to the general disclosure. This includes: 

  • transition planning: a section specifically on emissions targets in which a company explains its strategy to achieve its emission targets, notably its carbon offsets; 
  • climate resilience: the resilience of a company’s business strategy and business model in multiple scenarios; and
  • Scope 1-3 emissions: a requirement for all companies, regardless of business model, to disclose greenhouse gas (GHG) emissions in accordance with the GHG protocol. 

The ISSB plans to create more specific disclosures for sustainability material issues in the future. 

When will it happen? 

Although these standards are not mandatory practice, there is a possibility that national governments will introduce legislation that incorporates the ISSB standards. This is something that the UK Government has indicated it is considering in its upcoming Sustainability Disclosure Regulation. 

The ISSB is still considering feedback on the proposals and will likely develop a suite of standards on a range of sustainability topics in 2023. 

Restoring trust in audit and corporate governance

With all the current global geopolitical and macroeconomic uncertainties, and several auditing mishaps, the UK Government has released its “Restoring trust in audit and corporate governance” report. Its aim is to rebuild confidence through reformed regulation.

What do you need to know?

  • The Financial Reporting Council (FRC) is being replaced by the Audit, Reporting and Governance Authority (ARGA) in 2023/24 to have greater powers to oversee corporate reporting and auditing.
  • Companies with over 750 employees and more than an annual turnover of £750 million will be considered a Public Interest Entity (PIE) and will be required to comply with the reform.
  • Resilient statements are to replace going concern and viability statements for PIEs.
  • PIEs will have to disclose their distributable reserves and explain the board’s approach to  returning value to shareholders, along with how the distribution policy has been applied.
  • FTSE 350 companies will have to use a non-Big 4 auditor for a “meaningful proportion” of their annual audit or appoint one of the “challenger” firms to conduct their entire audit.
  • PIEs will have to publish an Audit and Assurance Policy (AAP) every three years with an annual implementation update.

When will it happen?

  • In May 2022 the UK Government released its response to the consultation and legislation is likely to take effect.
  • At this stage, there is no precise timetable, but the overall timescale for implementation is expected to stretch over several years in the case of some measures.

UK Sustainability Disclosure Requirements 

Following the publication of the UK Government’s Greening Finance Report in 2021, the Financial Conduct Authority (FCA) has published a consultation on proposed Sustainability Disclosure Requirements (SDR) and investment labels.

What do you need to know?

  • At this point in time, the recent consultation is focused primarily on the naming, marketing, disclosure outputs and labels of investment products.
  • The governmental report states that the UK will adopt ISSB standards. 
  • There are plans to develop a UK Green Taxonomy. 

When will it happen?

  • The scope and timing of requirements for companies, and the reporting detail, will be determined following consultation. 
  • Interim measures may be considered – e.g. referencing relevant voluntary frameworks – to ensure appropriate coverage of sustainability topics pending the introduction of relevant international standards.

Need help preparing for the regulatory changes in 2023?

We certainly understand that a lot is going on in the reporting space and you rightly may be confused on which regulatory scope your business falls within. We are here to help.

We will be providing training sessions, catch-ups and further clarity throughout 2023. If you are interested to hear from us, please get in contact.